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If They’re Worried, Maybe We Should Be Too

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Not long ago, Federal Reserve chair Janet Yellen proclaimed an economic meltdown like the one we saw in 2008 will not likely happen again “in our lifetime.” Why? Because banks are “very much stronger.”

Apparently, at least some of the world’s big bankers don’t agree with Yellen’s assessment.

They’re worried.

Over recent weeks, officials from a number of the world’s major banks have warned that the current trajectory is unsustainable, and a crash may loom on the horizon.

Now, if you’re a regular reader of the SchiffGold blog, you are used to warnings about unsustainable Federal Reserve policy, asset bubbles, and an imminent collapse. People like Ron Paul have been saying for years, you can’t run the world like this. It may be tempting to blow off all of this as hyperbole, or simply the musings of economic contrarians.

But these latest warnings don’t come from “gold bugs,” “preppers” or political outsiders. These bankers are the ultimate mainstream insiders, and it appears they’re getting nervous – despite Yellen’s unbridled optimism.

Richard Palmer from The Trumpet chronicled some of these statements.

The chief economist for the Bank of International Settlements sounded the most dire warning last month.

The end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance.”

The Swiss-based bank is often called the”central bank of central banks.” An article in the Telegraph summarized the BIS report.

The global economy is caught in a permanent trap of boom-bust financial cycles. This deformed structure is becoming ever more corrosive and dangerous as debt ratios rise to vertiginous levels, the world’s top monetary watchdog has warned. The Bank for International Settlements said the rot in the global monetary system has not been cut out since the Lehman crisis in 2008. The current ageing and unstable cycle could finish in much the same explosive way, contrary to the widespread belief that it was a once-in-a-century event caused by speculators.”

Bank of America’s global FX strategy team also weighed in, publishing a note directed at the Fed titled “Take that Punch Bowl Away.” The note warns central banks need to tighten monetary policy and they will “be sorry if they allow bubbles.”

If we are wrong and central banks do not take away the punch bowl, things will get much messier eventually. Bubbles may form that will eventually burst, leading to much higher volatility than necessary.”

You have to give credit to the folks at BoA for finally admitting loose monetary policy creates bubbles. But it seems they are about 8 years too late to the party.

Deutsche Bank strategist Aleksandar Kocic took the opposite tact. He warned that the Fed had better not take the proverbial punch bowl away too fast. He said ending the stimulus will be “especially tricky.” He also had some interesting insight into the long-term effect of central banks infusing the economy with easy money. He said policies like QE “have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich.”

It is not difficult to see how disruptive unwind of stimulus could become.”

Contrasting the concerns voiced by Bank of America with those of Deutsche Bank reveal the tight spot the Fed finds itself in. Yellen has put herself between a rock and a hard place. If she tightens, she risks bursting the bubbles. If she doesn’t, she risks inflating bubbles further, leading to an even bigger crash when they finally burst.

The Bank of England raised another concern – the mother of all bubbles – debt. The Telegraph summed up the problem.

British families are signing up for a lifetime of debt with almost one in seven borrowers now taking out mortgages of 35 years or more, official figures show. Rapid house price growth has ­encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments and easing affordability pressures.”

The most significant thing about these warnings isn’t their substance, but their source. These are major mainstream players in the world’s financial system. They generally like to keep a positive spin on things – like Yellen. If they’re worried, maybe we should be worried.

Palmer sums it up nicely.

These warnings are not from doom merchants, always saying the economy is about to tank. Not that the doomsayers are wrong—predicting exactly when everything all goes wrong is very hard. But these warnings are from banks. To characterize their warnings accurately, they’re not saying we’re hurtling toward an inevitable crash. The warnings from bis are the most dramatic, while those from the Bank of England are more relaxed. But they are warning that there is a risk.”

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